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A common control transaction is a transfer of assets or an exchange of equity interests among entities under the same parent’s control. “Control” can be established through a majority voting interest, as well as variable interests and contractual arrangements. Entities that are consolidated by the same parent—or that would be consolidated, if consolidated financial statements were required to be prepared by the parent or controlling party—are considered to be under common control. Determining whether common control exists requires judgment and could have broad implications for financial reporting, deals and tax.
Common control transactions arise in a range of circumstances. If your organization is contemplating any of the following, we recommend an early assessment of the implications:
Common control transactions fall outside the scope of the guidance for business combinations (ASC 805) because there is no change in control over the assets by the ultimate parent. This means that assets transferred to the entity are generally not stepped up to fair value. Instead, they are recorded at the ultimate parent’s historical cost basis. Exceptions to this general rule include the transfer of financial assets between entities under common control (ASC 860) or recurring transactions (intercompany sales/transfers of inventory). For more information on these exceptions please refer to our Business Combination Guide.
Whether the transaction should be retrospectively or prospectively applied is dependent on the nature of the common control transaction. Transfer of net assets or a business are reflected retrospectively, whereas transfers of assets are prospective. Judgment may be required around the following areas:
1. Is the transaction a transfer of an asset or of a business?
2. Has there been a change in the reporting entity?
Due to the limited guidance, judgment is required to determine whether the receiving entity has undergone a change in the reporting entity.
It’s important to remember that seemingly straightforward transactions can introduce common control complexities. For example, the receiving entity should account for the transaction at the ultimate parent’s historical basis. However, this does not always mean “carrying value” as there are often instances where the parent’s basis is not pushed down to the subsidiary.
Capital structure, valuation, and divestiture and disposals should be carefully considered during the planning stages, which can include:
Common control transactions can also create significant tax implications. Organizations will benefit from thinking through issues around combined basis and consolidated tax returns, including:
In a common control transaction, the tax basis of net assets acquired will result in temporary differences that impact the recognition of tax benefits.
As businesses navigate shifting market dynamics, an up-front and in-depth analysis of potential transactions can help avoid unintended consequences. This analysis is particularly important due to the recent updates to the FASB’s new definition of a business. PwC can help with this assessment early-on and can provide expertise and guidance throughout the process—from initial planning to post-acquisition financial reporting implications.
For more in-depth accounting guidance on these and other issues, visit us at pwc.com/us/cfodirect.
“Observations from the front lines” provides PwC’s insight on current economic issues, our perspective regarding the financial reporting complexities, and what companies should be thinking about to effectively address those issues. For more information, visit www.pwc.com/us/cmaas.
Deals Partner, PwC US
Brandon Campbell Jr.
Managing Director, PwC Deals Practice, PwC US